Before intiating litigation in this matter, it may help to seek help from a neutral-third party mediator. Many times, court offers mediators to try to resolve these isses for free. Thank you and I wish you the best of luck in your case!
I'm just curious if she made the same complaints against the previous occupants. Does she also have any problems with the neighbors on the other side? Does she have especially sensitive hearing that makes small noises especially loud for her? Or is it just because you have young children? If you do recognize that your children can be especially noisy from time to time (based on their ages that would be normal) and you recognize that living in such a close community could infringe on the "qiet enjoyment" of a neighbor's use of their own home, maybe the two of you could go in together and share the cost of installing noise barrier materials in the shared wall? If its a party wall, you wouldn't need board permission, but if the Association owns the space between walls, you may need to discuss it with them. It may be worth the cost, improve neighbor relations and prevent any threats of further lawsuits. (It also may be cheaper in the long run both financially and peace of mind). If she won't assist in the cost, maybe you could get her permission to put in a barrier anyway, if she co-owns the space. IF so, I'd suggest getting her permission in writing.
This is not intended to be legal advice or create an attorney-client relationship. If more information is needed, you should consult with an attorney in your state regarding the specifics of your situation and the options available to you.